FairPay, "A Novel Architecture," in Journal of Revenue and Pricing Management

This excellent overview of FairPay and why the thinking behind it is broadly important was just published in the Journal of Revenue and Pricing Management, and is available online (free to all under open access).

This expands on and updates a brief introductory article in Harvard Business Review (2013). Marco Bertini was my co-author on both.

This new paper more fully presents the core ideas behind FairPay, and how they fit into a flexible architecture for better pricing that moves the exchange between seller and buyer from the transactional to the relational.

The abstract:

As commerce continues to shift to the digital domain, organizations respond by improving and evolving their approach to creating value for customers. When the time comes to convert digital anything into cash they can bank, however, the same organizations seem stuck in time. The purpose of the article is to highlight this inconsistency and, importantly, propose a solution. First, we leverage the literature on freemium and participative pricing mechanisms to lay the foundations for a revenue architecture fit for the digital economy. We argue in favour of three building blocks: empowerment, dialog, and reputation. Second, we describe FairPay as a promising configuration of these factors.

We hope you will read it, and find it helpful -- and will let us know what you think.

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Marco is associate professor and department head of the marketing subject area at ESADE (a world-class business school in Barcelona, Spain). He is a prolific author in HBR and other leading business and academic journals, and has been working for some time on many of the strategies that FairPay builds on. He completed doctoral studies at Harvard Business School, and was previously on the faculty at the London Business School. (More background on Marco and his work.)

My background is as a practitioner in online media and e-commerce, and the technologies that drive that (bio).

My great thanks to Marco for this very rewarding collaboration (and to Dan Ariely and Ayelet Gneezy for connecting us). We found much synergy in our ideas, and the citations in this paper highlight how much of Marco's work is supportive of the strategies that FairPay draws power from.

I am very pleased that this new publication presents these ideas concisely and compellingly, and will bring awareness to more people about this new logic to power a more win-win approach to commerce.

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More about FairPay

For a full introduction to FairPay see the Overview and the sidebar on How FairPay Works (just to the right, if reading this at FairPayZone.com). There is also a guide to More Details (including links to a video). 

Even better, read my highly praised new book: FairPay: Adaptively Win-Win Customer Relationships.

(FairPay is an open architecture, in the public domain.)  

(My work on FairPay is pro-bono. I offer free consultation to those interested in evaluating and applying FairPay, and am happy to address questions.)

Thaler's Nobel, Surge Pricing, Fairness, and Long-Term Relationships

Some very nice insights on this theme are woven together in the latest Upshot reporting by Neil Irwin. It shows how Richard Thaler's behavioral economics adds deeper dimension to the debates about surge pricing -- and how that ties to underlying issues of fairness and long-term relationships, beyond the usual conflicting simplistic responses ("not fair"/"sound economics").

My congratulations to Thaler on winning the 2017 Nobel Prize in Economics last week for his work in creating the field of behavioral economics. That is a key foundation for my work on FairPay, and I am very appreciative to have gained his encouragement, as noted below.

When we look beyond the surface, we see that fairness in long-term relationships is what really matters for economics to work well, and that leads to the values (fairness) that we all seek. Thaler developed behavioral economics to look deeply at those deeper issues of human value and behavior. FairPay makes that the center of an new logic for consumer commerce that is badly overdue in our new digital age.

Some relevant quotes from Irwin's article:

For artists, no one show exists in a vacuum. And the things that might maximize revenue for any given night might not be the elements that matter in the longer term in developing devoted fans.

...So one view of the Springsteen approach is that it is economically irrational. But another is that it is part of a long-term relationship between a performer and his fans.

...Utilities and regulators, in other words, have to think a little like Mr. Springsteen: It’s not just about maximizing the efficiency of the energy market on any one day, just as the Boss isn’t trying to maximize his revenue from any one concert. Rather, it’s about maintaining a relationship in which people do not feel like they have been exploited.

...People’s perceptions of what is fair and just are not set in stone; they evolve over time. But companies looking to use variable pricing have to be cognizant of how important it is to respect those perceptions.

...What the successful examples of variable pricing have in common is that they treat customers’ desire for fairness not as some irrational rejection of economic logic to be scoffed at, but something fundamental, hard-wired into their view of the world. It is a reality that has to be respected and understood, whether you’re setting the price for a highway toll, a kilowatt of power on a hot day, or a generator after a hurricane.

“If you treat people in a way they think is unfair, then it will come back and bite you,” Mr. Thaler said. And it doesn’t take a Nobel to understand that.

Numerous posts on this blog address similar underlying issues related to consumer perceptions of price discrimination (including surge pricing) -- and how a more enlightened variation that I call "value discrimination" can be very fair and broadly beneficial to consumers.

I was privileged to get Richard Thaler's attention and encouragement when I wrote to him in 2015 about how nudging is a key aspect of the FairPay strategy, referring to my blog post, How Consumers Can Nudge Corporations for Good (which commented on a piece by him in the NY Times). He then connected me to his colleague, Heather Caruso, executive director of the Center for Decision Research at the University of Chicago Booth School. After some encouraging discussion, she indicated that their center would be interested in possibly being a resource for help in conducting experiments when a company is ready to do a trial.

With regard to trials, businesses, entrepreneurs, researchers, or others who might have interest in applying FairPay or related strategies are invited to contact me for pro-bono assistance. (FairPay is an open architecture in the public domain.)

More detail on how behavioral economics supports the strategies that underlie FairPay is in my earlier post, Thinking Fast and Slow about FairPay: A New Psychology for Commerce in a Networked Age, and in Making Customers Want to Pay You -- Research on How FairPay Changes the Game. (I previously had brief interchanges with Daniel Kahneman, the first winner of a Nobel for related work in behavioral economics, and author of Thinking Fast and Slow.)

We are just beginning to see the real world results of the more human side of economics that Kahneman, Tversky, and Thaler shined their light on.

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For a full introduction to FairPay see the Overview and the sidebar on How FairPay Works (just to the right, if reading this at FairPayZone.com). There is also a guide to More Details (including links to a video).

Even better, read my highly praised new book: FairPay: Adaptively Win-Win Customer Relationships.

(FairPay is an open architecture, in the public domain.)

Open Letter to Robert Iger on "Designing" the ESPN Fan's Experience

Robert Iger of Disney recently made a very interesting statement about where ESPN will be going:

You'll be able to pick and choose over time what it is you want, it won't necessarily be a one-size fits all. … the goal eventually is to create something that a sports fan can essentially use to design what their sport media experience can be.

...you will be able to...buy...a sport, a sporting event, a season, a league, maybe a conference.

This represents a big step forward -- but it is just a beginning. I assume this means not just old-fashioned a la carte (at single-item prices), but some kind of pricing for personalized bundles -- with bundle discounts that make the monthly cost reasonable.

• That would be a step toward more customer-value-first thinking about selling digital content. 
• It recognizes that the future of media is in building relationships with each customer that recognize that each customer is different, and needs a different package of value
• ...and that each personalized package should be priced in the context of the relationship, not just as one-off transactions.

That is certainly a big step from where Disney and most media companies are now, but I am hopeful that Disney is thinking still farther ahead, to the next step -- also a big one.

Not "to design" -- the way to design is to be

That next step forward will be to recognize that the sports fan does not want “to design what their sport media experience can be” – they just want it to be what they want it to be. Designing it is a hassle -- and has risk. How can a fan know what they want their package to be until the time comes? Good post-pricing can let them just experience it as their desires take them, then pay a reasonable price (after the fact). That removes the hassle and risk of “designing” the experience in advance.

According to The Way of Life, the founding wisdom of Taoism, "the way to do is to be." If we try to design how we will be, that is distracting, and makes it hard to "be here now." Of course it is desirable that ESPN move toward letting fans "design what their sport media experience can be." But they don't really want to have to think about designing it, and they can't really know in advance how they will want to design it.

Reducing the pricing risk

So what fans really want is to just let their experience be what they want it to be -- as that varies through time and circumstance -- as long as they have some confidence they will not regret how much it costs.

The challenge is in enabling that confidence. We do a poor job of that now, but we can do much better, by applying more flexible and adaptive strategies for setting prices.

Now:  Current subscription bundles for TV (and other kinds of content) require customers to pre-select a bundle of services they will pay for -- excluding other services they don't think they want to pay for (during that pre-selection). For cable TV bundles, that defines which channels I can and cannot watch. For the new ESPN service, it may be which sports, leagues, or teams I can and cannot watch. Of course I may have a good idea of what I expect, but things change over the course of a season. Some things get less interesting and some more interesting, in ways that are unpredictable.

Soon?: A relatively simple "post-pricing" strategy that I have proposed -- "post-bundling" -- sets a framework for finalizing prices after each month of viewing, but still applying volume discounts and price caps comparable to those for a conventional, pre-set bundle. That would enable ESPN to retain full control of how it prices these bundles, but give the customer free range, run-of-the-house access to compose the bundle on the fly. The experience could just be, with a level of confidence the price will be reasonable. (Perhaps I am just reading what I want into that quote, but I hope that is what Iger plans to offer.)

And beyond?:  A further step toward letting the experience be, with assurance the price will be fair, is something like the FairPay strategy. That recognizes that the value of the experience is co-created with the customer, and that only the customer knows how much value they actually obtained. That depends on how they watch (engagement, replays, etc.), who they are, what they value, and their ability to pay. The business can infer some of that (from usage stats and other data), but some of it is known only to the customer. To achieve a level of value discrimination that fully takes that into account -- to set prices that neither leave money on the table nor exclude customers who could be profitable -- the customer must participate at some level in how the price is set. FairPay offers an architecture for variable levels of customer participation -- at the discretion of the business. The business can maintain more or less strict control (for customers it lacks confidence in), or can give up various degrees of control (for customers who prove they use their power fairly). This blog and my book explain how that can be done in a relationship that works as a repeated game -- a game that motivates cooperation over a relationship, based on trust and reputation.

I do not know what Disney plans to do, but the ideas I suggest here have been out there -- in Harvard Business Review, on my blog, and in my book, and in other publications. Many of the underlying concepts of customer-value-based and participative pricing are becoming widely accepted as best practice. I have had discussions (at least elevator pitches) with top executives at many of the largest media companies, and many consultancies. Many are already tuned in to these general directions and excited by the prospects, at least to some degree. Most find the new ideas in FairPay thought-provoking. They recognize that it will take time, testing, and adaptation, but see the potential to change the game (at least in some business sectors and market segments).

I take this as a sign that Disney sees the importance of this vision at the highest levels, at least in part -- it sounds like they are moving in the right direction. I hope they will fully commit to the customer-value-first path that enables each fan's experience to be what they want it to be -- with the freedom and flexibility they want, and with high assurance that the price will be reasonable. That means working with each unique customer, individually -- not just offering one or a few "one-size fits all"cop-outs. Disney has shown at least some research interest in pricing innovation along these lines -- including seminal work with leading scholars.

Many businesses are beginning to think along these lines. The path will take work, and experimentation, but the rewards are compelling: happier and more loyal customers, and more of them -- yielding more customer lifetime value -- on average, and in aggregate.  Those who move early and well stand to gain the high ground of a loyal customer base.

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For a full introduction to FairPay see the Overview and the sidebar on How FairPay Works (just to the right, if reading this at FairPayZone.com). There is also a guide to More Details (including links to a video).

Even better, read my highly praised new book: FairPay: Adaptively Win-Win Customer Relationships.

Partners, not Suckers -- From Price Discrimination to Value Discrimination

"How Online Shopping Makes Suckers of Us All" is a very nice analysis of how "standard prices and simple discounts are giving way to far more exotic strategies, designed to extract every last dollar from the consumer."

This article by Jerry Useem in The Atlantic provides a big-picture view of the growing use of dynamic pricing to seek perfect price discrimination -- how companies "are comparison shopping us."  It highlights the current race to the bottom in e-commerce. It also points to the emergence of more positive approaches like Everlane's efforts at "radical transparency" that seek a more cooperative approach.

A recent WSJ article on algorithmic pricing for gas stations gives related background, but observes how there a glimmer of a win-win aspect to dynamic pricing: "This is not a matter of stealing more money from your customer. It’s about making margin on people who don’t care, and giving away margin to people who do care."

I say we can make business far more win-win (at least for many kinds of services) -- all we need is a shift in perspective.

Value Discrimination

This blog explores how both profit-seeking companies, and value-seeking consumers can benefit from refocusing their efforts (especially for digital products/services):

• From optimizing for price discrimination in transactions
• To optimizing for value discrimination in relationships .

There are three reasons:

1. Price discrimination is largely a zero-sum game at the transaction level, but win-win games become more powerful when commerce shifts to a relationship level. Amazon Prime is a clear example of how building a relationship focus shifts consumers from bargain hunting to value-seeking. Prime members value the convenience and the trust that their value proposition is "good enough" at a transaction level -- even if they do not get an optimal price for each transaction, they optimize value at a relationship level.
2. Digital products/services are "experience goods" -- their value is hard to know until after they are used. Furthermore, their value is very personal and context-dependent, and thus hard to estimate without feedback from the customer. Transaction pricing remains a conundrum. Relationships build trust and limit risk, and average out the noise of transaction-level pricing.
3. Digital products/services have essentially no scarcity or marginal cost, so cost-based pricing and demand-based pricing (related to allocation of scarce goods, the invisible hand) no longer apply. The only reason to pay is the desire (or duty) to sustain future supply.

Thus for digital goods there is no cost-basis for pricing -- it is entirely based on value and willingness to pay. But that provides new kinds of learning opportunities (freemium being just a crude first step) to really find out what people value and are willing to pay for, and to find new ways to be fair about what customers should contribute to fund production of the services that they really want.

The bottom line is that for digital products/services, a relationship-focused, cooperative, transparent approach can be far more effective. No one has yet put all the pieces together, but my work on FairPay points the way. It all revolves around a shift in mind-set toward

• a transparent, cooperative process  
• value over price 
• personalized services rather than standard products. 

We see elements of this emerging in a variety of partial steps, such as these:

• Everlane's limited "Choose What You Pay" variant of pay what you want pricing (PWYW) lets the buyer participate cooperatively in price-setting by choosing any one of three prices. Everlane is "radically transparent" in explaining how much each option sustains the seller's ability to provide service. Here customers know they are paying at least "at cost" for clearance items, and 13% of them willingly pay more than the "at cost" price to help sustain a business they feel offers desired services (even though they are not required to do that). (Details are in the Atlantic, and my prior post).
• Amazon Prime's focus on relationships rather than one-off transactions (as well as its Subscribe and Save discount offerings). Jeff Bezos may be hard-headed, but he is certainly not short-sighted.
• "The Subscription Economy" more broadly, with its focus on relationships driven by value-in-use -- the idea that value really derives from the service we get from "goods" as services, not from the goods (products) in themselves. 
• Membership models (a more value-focused variation on subscriptions), which are being increasingly viewed as the future of journalism -- as I explored a few years ago, and is now the focus of the Membership Puzzle Project.
• "Value-based pricing," which shifts from cost-based and competition-based pricing rationales to the more win-win idea that price should correspond to the value the customer gets from using the product or service. Another post explains how all pricing can be viewed as being on a "ladder of value." Going up the ladder moves from prices pre-set based on predicted average value to prices set after usage based on value-in-use as measured in terms of performance or outcomes as obtained by individual customers. This is becoming best-practice in many B2B markets, and it applies for B2C, as well.
• Crowdfunding patronship approaches to funding ongoing creation, such as offered by Patreon and IndieGoGo, in which consumers willingly pay to sustain creators they want to support.
• Similar PWYW models, especially those that draw on human values for motivation, such as those offered by Humble Bundle and One World Everybody Eats.

Back to the future

The Atlantic article gives a nice perspective on the commercial drive toward price discrimination, and how what we see now is the result of over a century of mass marketing that has driven both sides to a zero-sum transaction mentality.

• We are so used to this model, with its resulting race to the bottom bargain hunting, that we forget that it is not the natural behavior of human commerce. Humans can play the bargain hunting game, and some even learned to enjoy it, but it is neither natural nor productive. As the Atlantic article observes, people are tired of wasting their time at it, and reach "a shut off point." 
• Traditionally, commerce was driven by human relationships -- while prices considered costs and competition, they were ultimately based on value (as I explored previously.). 
• Value based pricing in B2B markets shows how a return to those values can work, but not how to make that simple and scalable enough for mass consumer marketing. 

FairPay shows how our digital environment enables us to return to those values by shifting our ideas about commercial relationships -- from haggling about transaction prices to cooperating to set prices in a relationship, based on "dialogs about value" aimed at gaining a shared understanding of the value of the relationship. That is simpler, less adversarial, and more effective (and that is what works in advanced forms of B2B value-based pricing), and it is not so hard to do with computer support. I call the "social contract" that drives this new kind of cooperative process an "invisible handshake." It shifts commerce from a series of zero-sum single-transaction games to a repeated game of relationship that encourages cooperation. 

FairPay's repeated game revolves around these "dialogs about value" that make this process explicit and transparent. It seeks to approximate a deeper economic idea of perfection, as I describe in a thought experiment that provides an underlying model for thinking about pricing and relationships. 

FairPay creates a mass-customized process for seeking "value discrimination." As those articles explain, marketers and economists traditionally think about "price discrimination" as a way to be efficient in getting the most revenue from each customer. But in recurring relationships, what we really seek is value discrimination -- finding the optimal value proposition for each customer. We seek  to maximize not only Customer Lifetime Value (what the vendor cares about), but also Vendor Lifetime Value (what the customer cares about). 

Value discrimination involves optimizing not only the prices obtained, but also the product/service package value that is offered and delivered at those prices, to that customer. Not only does this make the process more win-win with regard to both price and value, but it provides a direct operational map for guiding the business to provide the greatest possible value to each interested customer. Over the lifetime of the relationship, it is both the right price and the right product/service package that guide the path to maximum profit -- and maximum value to customers and society. When done with transparency and fairness, discrimination can be good!

Climbing this ladder of value and making the behavioral changes that refocus all parties on value will take time -- and can occur over each of multiple dimensions of pricing, packaging, and product design. It can happen very quickly for some customer segments in some markets. It will take longer for some customers (those who thrill at the competitive nature of the zero-sum bargain hunting game and are less appreciative the broader aspects of service value) -- and in businesses that are constrained by scarcity, and/or are unable or unwilling to offer services that differentiate themselves. A full spectrum of approaches will coexist for some time.

But it seems clear that value discrimination is the path for the future. Most of us consumers want to be the ones to decide, in transparency, when we want to be generous -- instead of being manipulated in the dark to be "suckers." Even when the result is beneficial -- "making margin on people who don’t care, and giving away margin to people who do care" -- we consumers want to have transparency and choice. Instead of the invisible hand that pushes us around at a transaction level, we can build win-win relationships on this more transparent and cooperative (not so invisible) handshake.

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For a full introduction to FairPay see the Overview and the sidebar on How FairPay Works (just to the right, if reading this at FairPayZone.com). There is also a guide to More Details (including links to a video).

Even better, read my highly praised new book: FairPay: Adaptively Win-Win Customer Relationships.

Finding Value in The Subscription Economy

At the heart of the Subscription Economy is the idea that customers are happier subscribing to the outcomes they want, when they want them, rather than purchasing a product with the burden of ownership.

...Nicely put by Zuora, the SaaS platform company that drives many of the largest subscription services. They have popularized the term "subscription economy," and recently created a Subscription Economy Stock Index that highlights the striking growth of such businesses. This is not just a Zuora thing -- as the Oracle infographic to the right indicates.

This fundamental shift toward subscriptions is driven by the nature of our digital environment, and the power of Big Data and the Internet of Things. It is becoming easy to manage ongoing subscription relationships and service delivery -- and to get increasingly rich understandings of actual value received. We are only beginning to recognize how deeply this will transform how we exchange value in commercial relationships.

This post explores the key concepts of value as they apply to subscription relationships -- and as they are are embodied in the pricing of subscriptions. This draws on "value-based pricing" strategies that shift from simple (but less optimal) cost-based or competition-based models. (These are increasingly transforming B2B markets, but have so far seemed less readily applied to B2C markets. FairPay, a new approach to value-based consumer relationships, promises to change that game.) This post shows why shifting toward value-based pricing -- even if only in small, incremental steps -- is vitally important to maximizing the value of subscription relationships -- Customer Lifetime Value (CLV).

[UPDATE 4/20/17:] Think of this is "value discrimination." Marketers and economists think about "price discrimination" as the way to be efficient about getting the most revenue from each customer. But in recurring relationships, what we really want is value discrimination -- finding the optimal value proposition for each customer. Value discrimination involves optimizing not only the price, but the value of the product/service package that is provided for that price.

Value is complex, multidimensional, and highly individualized 

Our digital age has not only driven "relationship marketing" to become deeper and more powerful, but has changed the economic realities of value -- shifting focus from "value in exchange" to "value in use." That is what the opening quote from Zuora referred to, "the idea that customers are happier subscribing to the outcomes they want, when they want them..." We generally do not really want products for their own sake, but as services that produce outcomes. Subscriptions are not a product with a set value in exchange, but a structure for a service relationship that produces a dynamically varying value in use.

Current subscription models drive toward this idea of value-in-use, but do not yet fully embrace it. Our concepts of value and value-in-exchange are still rooted in the old logic of products ("goods"). Value-in-use can not be known until after use. Not only does value vary from subscriber to subscriber and from period to period, but there are many factors involved in estimating value.

• Is the value tied to the period of access and/or the amount of access (permitted or used)? 
• Is it per unit of product/service? 
• Is it how well the service met quality or service-level standards (performance)? 
• Is it what the experience achieved, what benefits it led to, or how well liked it was (outcomes, whether objectively measured or in customer perception)? 
• Is it a matter of broader values, like cultural merit or support for social/civic/environmental values (including economic "externalities")? 
• Is it affordable to me (willingness/ability to pay), and does what I pay sustain creation of more content or services that I desire?

An ideal market system would factor all of these aspects of value into pricing. For example, the value of a content service is not just how many songs or videos or stories I have access to, nor how many I do access, nor whether they arrive without halts or delays, nor whether I play all of an item or hate it and stop, nor whether the service pays its creators and employees, and avoids pollution, nor whether it is priced within my means. Ideally it is a reasonable combination of all of these.

The question is: how well can we do at approaching that, in a way that still creates a good customer experience without undue complexity? In this digital era, we are gaining a wide range of Big Data that bear on understanding value -- data that directly or indirectly provide new insight into:

• the usage of products and services with detail on what we use, when, and how completely or intensely
• the performance of what we use and the quality of the experience
• the objective and subjective results of the experience.

Marketers are already using newly available data to target their offers, and to factor better predictions of value into their pricing. But subscription pricing strategies are just beginning to address the gap between average predictions of value and the widely varying actual experiences of individual consumers. 

Climbing the ladder of value -- profiting from more win-win relationships

Consider the range of approaches to price that we commonly see in practice and how they track to value. Keep in mind the fact that value in use, the outcome of a service, is difficult to predict in advance, and varies from customer to customer and time to time -- and so is best assessed after use, when the outcomes are known. There is also the problem that important subjective value perception data arises from within the head of the consumer -- that aspect of value can be hard for the business to know, even after the fact.

Uncertainty in quantifying value realization forces us to address the related question of who takes on pricing risk? This has important implications. How much use will I get from my subscription? Must I lock in a package rate to get a volume discount, and then have to wonder if I will use enough of the package to get the value expected? What if I use it, but am disappointed?

• Pre-setting prices puts the pricing risk on the consumer (causing many to refuse to take the risk at all, resulting in lost revenue), and often leads to disappointed customers (which hurts customer retention, thus reducing future revenue).
• As practitioners of value-based pricing recognize, offloading pricing risk from the customer is a service, and one that can increase sales and loyalty. Think of it as pricing-risk-management as a service.
• For digital services (which typically have near-zero marginal cost for unlimited replications), businesses have little to lose by taking on pricing risk (as long as they manage that risk effectively).

Both parties suffer when services are priced in a way that a) poorly correlates to the value the customer receives, and b) forces consumers to take on unwanted pricing risk. Specific strategies can be understood in terms of how they combine three aspects of pre- (versus post-) pricing risk:

1. Pre-set packaging of an assortment or bundle of items or services in a subscription. Do you have run-of-the-house access to a full range of items or services to choose from, as you decide you want them, or must you choose a specific assortment or bundle in advance? This comes up when you subscribe to TV channels in bundles, or to NY Times news plus crosswords, or support a museum or a musician on Patreon, and choose from multiple packages with different perks at different prices. Do you know in advance what combination you will want and how you will value it?
2. Pre-set usage levels. If you subscribe to a service, does the price depend on how much you use it, building in volume discounts? Other things being equal, a customer who uses many articles, songs, programs, or whatever, per period will presumably get more value than one who uses only a few. Does the price reflect that? Unlimited usage plans do not -- so heavy users get a bargain, and light users subsidize them (and may not find it worthwhile to subscribe at all). Beyond that, usage-related pricing generally tracks better to value when it applies volume discounts, as with mobile data plans, and TV channel bundles. (Such prices can vary a unit at a time, or be fixed within set usage bands.) Volume discounts can factor in both diminishing returns to the customer and economies of scale to the supplier. 
3. Pre-set price schedules. Even when pricing depends on usage, and offers volume discounts, that usage is most commonly priced using a pre-determined price schedule, which presumes some average quality of outcomes. More advanced value-based pricing approaches can allow the price schedule, itself, to depend on actual outcomes. For example, the price of an article or song or video may depend on the value I actually get (/perceive) from it. One simple example is when a sales commission depends on the price obtained for the sale. Outcomes pricing is generally not done in current consumer subscription plans (but is a feature of the new FairPay strategy).

Whatever the particular form of pre-pricing, the business must try to predict pricing levels (/tiers/packages) that work on average, but will inevitably work poorly for the many consumers who diverge from the average in one way or another. To the extent that such pricing decisions can be deferred, greater price discrimination can be achieved in a fair and transparent way. That leads to better economic efficiency, higher profit, and happier customers.

More detail on "Understanding the rungs on the ladder of value" is provided in the sidebar below, but to cut to the chase...

Maximizing CLV and Value Experience

The established wisdom of subscription economy businesses is that it all about Customer Lifetime Value (CLV). The problem is that this is generally viewed from a one-sided perspective -- value to the vendor. But value to the vendor is maximized when the relationship is win-win. It is a matter of fair balance -- maximizing CLV requires equal attention to how the customer values the relationship: Vendor Lifetime Value (VLV).

• It is costly to acquire customers, and therefore it costly to lose them and have to replace them -- recurring revenue models work best when the revenue recurs. 
• Customers are retained when they feel they are getting good value for their money -- for what they really want. That is especially likely when they feel the business is listening to them, understanding what they value, and seeking to deliver that at a fair price. 
• To the extent that we can migrate toward pricing methods that offer better mappings to value-in-use, customers will be happier and more loyal, and move toward maximum CLV (and VLV).

It is easy to get lost in the mechanics of pricing and subscription models (which are complicated and full of compromise) and lose sight of the underlying goal -- to find a right price, for each customer -- a price that each customer will view as fair compensation for the value they seek. We are so used to the compromises and nasty zero-sum games that are the dark side of the past century of mass marketing, that we often descend into a cycle of exploitation on both sides. Businesses treat the consumer's perception of the total value proposition as something to manipulate and exploit, and, as a result, consumers distrust businesses and try to "hack" them. But as businesses become "customer-first" and oriented to "customer experience" (CX), we see that what really matters is cooperating in a joint, effort to co-create value, to maximize "value experience" (VX).

A few decades is a long time in our personal lifetimes, and that makes it is easy to forget that we are still in the infancy of the digital era, with many deep changes yet to come. But we do see that a few decades into the digital era we are still in a time of continuing disruption and turbulence. As Peter Drucker said, "The greatest danger in times of turbulence is not the turbulence, it is to act with yesterday's logic." Moving toward value-based post-pricing will move us toward tomorrow's logic -- to reduce the cost and risk in how poorly prices track to value. It is that new logic that will fully realize the value in the subscription economy.


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Sidebar:  Understanding the rungs on the ladder of value

A more detailed view of how this plays out in subscription pricing plans is outlined in the following list (drawing on an earlier post, Beyond the Deadweight Loss of "All You Can Eat" Subscriptions). Looking at this progression, ordered roughly in accord with the degree of value-based post-pricing, it becomes apparent that we are only at "the beginning of the beginning" of our evolution toward a commerce for the digital era.

• Unit sales of items (pre-priced). This is the pre-subscription base case. Examples are song/album, video, e-book, and article ownership downloads (with or without cloud repositories). This is simple and easy, but tracks to value only on average -- and as predicted, not as realized. It is a bargain for heavy users of specific items, but costly or prohibitive (and a management problem) for light use of many items.
• All You Can Eat (AYCE), unlimited subscriptions (pre-priced). The common model of all the items you want, time-limited to periods of subscription. This too is simple and easy, but has similar kind of unfairness and inefficiency -- still tracking to value only on average (overpricing light users and underpricing heavy users), and considering value only as to the predicted average experience, not the value-as-realized. Many potential subscribers who are unsure of the value or how much they will use (or expect it will not be much) are disinclined to subscribe. Often referred to as paywalls (with all the exclusionary connotations of a "wall,") these also include tiered variants with levels of premium access, including freemium versions that begin with a free tier (but still place a paywall at some pre-set premium level). 
• Membership models (pre-priced). These are a form of subscription with a more cooperative, participative orientation, such as for publications, artists/creators, or museums -- sometimes using crowdfunding platforms like Patreon or Indiegogo. These may seem more voluntary than hard paywalls, and often include tiers or bundles that include different levels of perks, but still have pre-set prices for given levels of service (see pre-bundling, below, and note that these perks, such as T-shirts and tote-bags, are often gimmicks of questionable value).
• Partially usage-related subscriptions (pre-priced for the most part). These improve on unlimited models by adding usage-related tiers, such as for varying levels of mobile data service, how many TV channels are viewable in a bundle, or how many DVDs or e-books you can have out at one time. In most cases not only are the price schedules pre-set by the seller, but the customer must pre-select which specific tier or bundle they want. These can track better to value, in terms of usage, but only based on pre-defined units of usage -- without considering the experiential value of that usage.
• Fully usage-based subscriptions (pre-priced schedule applied to actual, metered usage). Currently, these are most widely accepted in B2B, such as jet engine "power-by-the-hour" and fleet "tires-by-the-mile." These have also been used for B2C, such as the old "per-minute" charges for mobile phone and dial-up Internet services. Consumers often dislike these plans because of the unpredictability of both usage and value, and the relentlessness of the "ticking meter." However, in some B2C uses the tracking of usage units to value can be quite satisfactory. Tire miles and engine hours are manageable and serve as a good estimator of the broader business outcomes.
• Pre-bundled subscriptions (pre-priced menu). These can be forms of any of the above in which the customer is given a set menu of options (pre-set, tiered packages) to select from at pre-specified prices. The use of tiers and packages with appropriate volume discounts leads to a better fit to value (for the tier or package), but in a very static way -- it forces the customer to select a tier or package before knowing if they really want it and will find value in it, and sets the value based on predicted averages, not actual value in use.
• Post-bundled subscriptions [new] (post-priced in part based on actual usage -- but still based on pre-set volume discount schedules). This is an enhancement of conventional subscriptions that I have proposed, such as for TV services, that offers discount prices at levels comparable to current TV bundles, but with the composition of the bundle set after the fact, so that customers can watch whatever channels they want, while still benefiting from a bundled-rate discount. This can track significantly better to value as it varies from customer to customer and month to month. It does not directly address outcomes (did you like that program?), but refund options can be provided (for each program view) to add a degree of outcomes tracking (duds are free).
• Performance/Outcomes-based pricing (post-priced based in part on actual usage, with a price schedule that is based on performance or outcomes). This goes beyond usage alone, to factor in the quality or result of that usage. Performance-based pricing is common in digital advertising (clicks, leads, transactions) and other B2B markets. Outcomes-based pricing takes that farther up the value ladder, and is increasingly applied in healthcare (where the price schedules are typically set in advance, based on prior results in test populations). Of course it would be more desirable to base the schedule (at least in part) on actual individual customer outcomes, where that is feasible (pay if cured). 
• Soft values as pricing factors (pre-priced or post-priced). This adds consideration of broader values in the overall experience, like cultural merit or support for social/civic/environmental values. Conventionally, this is rarely an explicit factor in pricing, but some aspects are increasingly implicit in prices, in the form of a tacit understanding that consumers are OK with paying a premium for goods and services that support broader human values and/or are produced and delivered in socially responsible ways.
• FairPay subscriptions (/memberships) (post-priced, with price schedules set after usage). This is the new value-based strategy that shifts to an adaptively cooperative process for "dialogs about value" that get finalized after usage to create the best practical approximation of price to value in use. (FairPay also applies elements of participatory pricing to optimally factor in the customer's perception of value-as-experienced.) FairPay is designed to co-exist, at whatever level desired, with the other methods above, and to be able to subsume them in a flexible architecture for collaborating on value and price (co-pricing). More about FairPay and how it can adaptively seek the best of all of these approaches is addressed elsewhere in this blog. It is not yet clear how widely applicable FairPay will be, but it points to many aspects of deeply value-based strategy that will almost certainly be important in one form or another.

[Update: related comments: The Relationship Economy -- It's All About Valuing Customer Experiences]

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(Other posts in this blog have explored many aspects of the subscription economy, and how FairPay offers a path to a next generation of more profitable subscription relationships. Recent posts explained how and why the FairPay strategy adapts the "value-based pricing" approach that is increasingly transforming B2B markets, but has so far seemed less readily applicable to B2C markets --and how FairPay's new approach to consumer relationships can change that game.)

For a full introduction to FairPay see the Overview and the sidebar on How FairPay Works (just to the right, if reading this at FairPayZone.com). There is also a guide to More Details (including links to a video).

Even better, read my highly praised new book: FairPay: Adaptively Win-Win Customer Relationships.

Value-Based Pricing Is Transforming B2B -- Now for B2C...

"There is broad consensus...that a pricing orientation based on customer value and customer willingness-to-pay is best and can positively influence pricing power and firm performance." -- Journal of Revenue and Pricing Management

FairPay is a new way to do value-based pricing -- in which prices are set based on the actual value realized by each individual consumer -- with a fair share of the value surplus going to the provider.

• Value-based pricing has proven transformative in B2B contexts. It is becoming accepted as best-practice, where feasible, even though this approach has been largely unknown in consumer markets. 
• Now FairPay provides a lightweight way to exploit the economics of digital to achieve similarly transformative win-win results, in a way that is suitable for many mass-B2C businesses (especially for digital content/services).

This post provides background on what value-based pricing is, and shows how and why it is increasingly transforming businesses in the B2B space. It explains why it has generally not been relevant for B2C businesses, and how FairPay provides a new variation on this theme that is specifically suited to consumer markets. (Links to authoritative references are provided -- it is strongly recommended that any manager with revenue responsibility understand this increasingly important new perspective on strategy.)

New pricing strategies can drive business design and disrupt markets

Before jumping into the details, let's be clear that these ideas go far beyond the narrow "green-eyeshade" confines of pricing that many managers tune out. Pricing is an often neglected aspect of strategy, given little attention or respect. But pricing can have huge impact on profitability, and value-based pricing has proven that it can transform fundamental business models and organization structures. It can drive design thinking in ways that improve customer relationships, disrupt competition, and reshape markets. As Peter Drucker said, "The greatest danger in times of turbulence is not the turbulence, it is to act with yesterday's logic." In these times of turbulence, pricing is too important to be left to the pricing specialists. 

Value-based pricing -- seeking optimal value exchange

The terms value-based, performance-based, outcomes-based, and success-based are often used for variations on the same basic idea. (I use the term value-based, for breadth and simplicity, since performance, outcomes, and success are aspects of value.) These all differ from more conventional cost-based (cost plus markup) and competition-based (what the market will bear) pricing orientations, which are widely used, but are more simplistic and generally less effective.

My particular emphasis is on post-usage assessments of value, which are central to individualized, in-context experiences of value -- these are most important to quantifying the true value to a given customer (especially for experience goods). The term value-based pricing is also used for less collaborative, pre-usage pricing variants that are based on generic predictions of value. That is a step in the right direction, but generic predictions are just expected averages, and thus a poor approximation of post-usage measurements of value, as actually realized by any given customer.

Value-based pricing seeks to approximate the ideal of perfect price discrimination, which captures maximum revenue from every customer (including many who would otherwise not actually become customers at all). As currently applied, experiential value-based (post-) pricing has generally been impractical in consumer markets, but it has proven very effective and efficient for industrial items or services. For post-pricing based on value, the challenge has been that this requires 1) that the parties can agree on how to measure value as it is experienced in context, and how to share in the value surplus that the product/service creates, and 2) that they able to do the analysis that requires, after the performance and outcomes are known.

While this had limited where value-based pricing has been applicable, it is widely accepted that digital transformation is rapidly expanding that applicability.

The following sections address how FairPay simplifies this process to make a new kind of value-based pricing practical for consumer markets, but first, let's look at the evidence of why this is so important.

Powerful lessons from the B2B world

The current special issue of the Journal of Revenue and Pricing Management is devoted to value based pricing -- its editorial observes (emphasis added):

There is broad consensus among pricing scholars, consultants, and practitioners that a pricing orientation based on customer value and customer willingness-to-pay is best and can positively influence pricing power and firm performance...More stories of successful transformation are being presented at pricing and business conferences. More firms are piloting value-based pricing with specific projects and technology platforms. 

One of the articles in that issue, The conceptualization of pricing schemes: From product-centric to customer-centric value approaches (by Stoppel and Roth), provides a conceptual structure and a survey of practice to show how this can "strengthen the relationship between customer and provider" and provide numerous mutual benefits.

Helpful background on why this is so powerful is contained in Is Performance-Based Pricing the Right Price for You?, a 2002 paper from Harvard Business School Working Knowledge (emphasis added):

Not every industry or company can benefit from performance-based pricing. But where there is a fit, PBP can be a powerful tool that merges the interests of buyers and sellers, says Harvard Business School professor Benson Shapiro.

Because pricing is such a difficult and complex arena, it has confounded sales and marketing executives and scholars for centuries. In no other marketing element is the two-sided conflict and cooperation nature of the buyer-seller relationship made so clear.

Part of the relationship is a zero-sum game between buyer and seller in which one's gain is the other's loss. Pricing is at the center of this part. But, there is a second, win-win part of most buyer-seller relationships, including almost all business-to-business relationships. The win-win part often includes improved products and services that simultaneously provide greater customer value and higher supplier profitability. We constantly strive to move elements of the relationship from the zero-sum conflict side to the win-win cooperation side to achieve business success and relieve personal angst on both sides. We have searched for ways to move pricing into the win-win category. In some situations, performance-based pricing can make pricing a win-win element of the buyer/seller relationship.

That paper goes on to give many examples, noting its popularity in advertising, as well as "industries as diverse as consulting, trucking, and heavy industrial services." It cites three advantages:

1. "alignment...between the buyer's goals and the seller's goals
2. "insurance...when the final performance of the service or product is in doubt," creating "a greater sense of 'fairness' for both buyer and seller" 
3. "the very process...develops 'wide-band width" communication between buyer and seller...a great deal of buyer/seller cooperation and coordination and literally a much broader agreement.

The downsides cited by Shapiro are that it "is complicated...the amount to be paid can not be determined until after delivery, and often even after usage' and that this "moves both the cost and price risk to the seller," (and that "it is not good for sellers who desperately need short-term cash flow"). It is this complexity that has kept such approaches out of B2C markets until now.

But Shapiro also observes that "the vendor then obtains the opportunity to better manage the spreads among value to the customer, price, and cost to its advantage. With risk comes added opportunity. The vendor who uses performance-based pricing must thus be willing to accept greater, two-sided (price and cost) risk for added reward opportunity." These are advantages that I have highlighted as the motivations for FairPay. This idea of opportunity coming out of risk is important, and is addressed further in the last section.

Additional interesting background that reinforces these points is in the chapter "Pay if it Works" in Smart Pricing, by Raju and Zhang of the Wharton School, and a more recent HBR article. 

This trend relates to the ideas described in my post, Price = Value, based on the growing acceptance that value derives from services, not goods (even if it is a service that is embodied in a good) -- and that companies can profit from that by setting prices based on the value of their services, not just the goods that they are based on. There have been many successes. Perhaps most familiar to people in content businesses are performance-based advertising pricing models, such as the shift from cost-per-impression to cost-per-click to cost-per-lead or cost-per-action. But industrial services provide many illuminating examples. For example, Rolls Royce profited from realizing that it need not sell jet engines as commodities, but could get more share of wallet and make its customers happier by selling "Power by the Hour," where the airlines pay for what they use, and leave it to Rolls Royce to manage high capital investment and critical maintenance efforts. GE and others now do the same. Michelin now sells tires by the mile to fleet owners.* There have been many more successes, including the example of Salesforce, which uses customized value-based pricing for its large accounts (as reported to me by the executive who managed development of that pricing system a decade ago). An important example where outcomes are increasingly viewed as an essential basis for fair and efficient pricing is in healthcare. (The Stoppel and Roth paper cited above provides additional examples.)

The advent of Big Data and the Internet of Things (IoT) is making this more feasible and effective in a much wider variety of businesses, as described in a 2014 HBR article. Value can be measured in any appropriate manner, reflecting usage, performance, outcomes, and other factors. (I addressed the similar potential for big data about content service use in an earlier post, "E-Books Are Reading You" -- How That Enables a New and Far Better Economics.) 

Value to the consumer! -- a win-win game

Now FairPay takes the principles of the value-based pricing and applies them in a lightweight and intuitive form to consumer markets. In doing this, it can flexibly blend desirable features of other pricing models in a new paradigm. It combines aspects of freemium and participatory pricing (along with post-pricing) in a new way -- one that gives buyers and sellers evenly balanced power to set individualized fair prices in "dialogs about value" -- a collaboration over time that can consider all of the relevant dimensions of value and fairness. Its assessments of value may at first be crude, but because of its continuously adaptive learning process they can be good enough, and get better, on average, as the relationship develops over time. (It also gets more seamless and habitual after a short initial learning period.)

Shapiro's paper nicely points out the zero-sum versus win-win game aspects of buyer-seller relationships (as quoted above). FairPay is based on just such a view, working as a repeated game that seeks win-win cooperation over the course of each relationship. The details of that game are described in my post, FairPay Changes the "Game" of Commerce, and how it works in various industries is outlined throughout my blog. A conceptual perspective on why this is important and how the value surplus can be shared fairly is in my post, An Invisible Handshake for The Digital Wealth of Nations.

Drawing on the conceptual model of Stoppel and Roth, pricing schemes have two key components: measurement units (that provide a basis for pricing), and calculation mechanisms (effectively the pricing rates that derive a monetary amount based on the units). These elements can be addressed in systematic ways in the large B2B contexts where value-based pricing has been successful, but are a challenge for B2C markets. The breakthrough of FairPay is to recognize that the individual relationships in B2C markets operate at a more subjective, intuitive, heuristic level, and that we can exploit computer-mediation to design the pricing game to operate at that same level.

• FairPay is not the same as traditional person-to-person negotiation, but both operate at a similar and appropriately subjective, intuitive, and human level. 
• The choice of measurement units and pricing mechanisms can be flexible and dynamic, because cooperation is centered on fuzzy aggregate values where these details are merely reference points for justifying an approximate valuation that is intuitively agreeable. 
• The business can accept some degree of transaction-level valuation errors (given the low marginal costs), as long as the overall trend of the relationship leads to fair and sustainable profit. 

FairPay pricing is emergent out of fuzzily approximate dialogs about value that converge toward reasonable accuracy and fairness. This has strong foundations in behavioral economics, as explained in Making Customers Want to Pay You -- Research on How FairPay Changes the Game and Thinking Fast and Slow about FairPay: A New Psychology for Commerce in a Networked Age

It is this embrace of fuzziness and emergence that enables FairPay to find a solution that transcends rigorous computational models to cut through the dilemma of unlimited all you can eat (AYCE) models versus metered usage-based models, both of which are inefficient and have consumer acceptance issues.* By accepting pricing risk (which is actually very manageable for digital services), FairPay opens vast new opportunities to collaborate, build loyalty, and upsell -- to maximize Customer Lifetime Value (CLV).

The competitive advantage of taking on risk

Expanding on the observations of Shapiro noted above, an article in the current issue of PWC Strategy+Business, The Uncertainty Advantage, notes that "Creative leaders don’t fear risk — they turn it into a money-making strategy."

There is no better source of profit than your ability to first identify the opportunity hidden in disruptive forces and then use it to differentiate your company from its competitors.

Post-pricing based on individual value is such an opportunity. FairPay recognizes that in a digital world, service providers risk little by taking on pricing risk, because their marginal cost of service is near zero. They can provide  a big win for their customers -- by taking on the customer's risk of disappointment, at little risk to themselves -- and thus create a big win for themselves.

FairPay can help us move from thinking narrowly about user experience (UX) and customer experience (CX) based on rigid, imposed pricing models, to the more central and win-win issue of value experience (VX). Notice that UX and CX consider the perspective of the user/consumer, but they do so with the the idea that the UX/CX is to be managed by the vendor (and with the vendor's unilateral price setting power). VX looks at this from the broader perspective that value is something that neither party owns or fully controls, but is something that both co-create and share in cooperatively. With this central focus on value experience, we can then find ways to cooperatively look beyond conventional notions of pricing, to change the nature of our business models, and make them more win-win.

Which is more win-win way to think about pricing? Which gives your customers a truly "customer-first" experience of value? Which will make your business most sustainably profitable? Isn't it time to give it a serious try?

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Some other discussions of value-based pricing on this blog [updated]:

• Finding Value in The Subscription Economy
• Win-Win Customer Journeys -- With Dialogs on Value
• Customer Journeys of Value -- Measuring the Elements of Value 
• Beyond the Deadweight Loss of "All You Can Eat" Subscriptions

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For a full introduction to FairPay see the Overview and the sidebar on How FairPay Works (just to the right, if reading this at FairPayZone.com). There is also a guide to More Details (including links to a video).

Even better, read my highly praised new book: FairPay: Adaptively Win-Win Customer Relationships.

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*Note important distinctions between models based on actual usage, such as power by the hour and tires by the mile, versus those based on potential usage, such as the all you can eat (AYCE) subscriptions that are becoming dominant is content sales (news, music, TV/video), as described in the Deadweight Loss post. Actual usage is a form of post-pricing, and thus tracks moderately well to realized value, while AYCE access subscriptions are pre-priced, with no correlation to whether usage (and thus value) is high or low. 

At a next level of refinement, actual usage is still not an ideal metric of realized value, especially for experience goods. For jet engines and fleet tires, hours or miles (respectively) will usually correlate well with value, but for news stories or videos, the number of stories or number of programs (or minutes) may not correlate very well with realized value at all. That unforgiving "ticking meter" is why conventional usage-rate-based pricing of content (pay per view and micropayments) has remained unpopular with consumers. The "subscription economy" moves us closer to actual value than an ownership economy does, but the measurement of subscription value is the key challenge in making pricing truly value-based and win-win. That is why FairPay (with its fuzzy, value-based blend of AYCE and usage pricing) can make all the difference.

Finding Good and Fair Customers -- Where Are the Sweet Spots?

Finding good customers is the essential to success for all businesses. It is especially important in early uses of the new FairPay business strategy that builds cooperative "customer first" relationships.

Almost everyone who hears about FairPay sees its appeal -- but they also see that, because this relationship-centered strategy seems unconventional, it may not be not suitable for all customers (at least not yet). So the question arises: "where does it work best?" Naturally, in experimenting with a new technique, the smart strategy is to begin with the low hanging fruit and low-risk learning. Here is a focused approach to finding those early sweet spots.

FairPay as a change in behavior

People almost universally understand the new balance of power represented by FairPay's invisible handshake as being compelling:

We will give you (our customer) real power to participate in pricing -- as long as you demonstrate that you are fair about it. We will reward your generosity -- but will withdraw this special privilege if you are unfair.

This makes relationship marketing a two-party repeated game that rewards cooperation on both sides, and is clearly in the interest of consumers who are willing to play. (As explained in FairPay Changes the "Game" of Commerce.)

Rational consumers should want to play the FairPay game with any business they want to have a maximally beneficial long-term relationship with. They will get the best value for their money (including value from the relationship that they could not otherwise buy at all). But behavioral economics has shown us that consumers are not homo economicus, not all that rational. So the questions are how will real customers react? There are two related questions:

1. How hard is it to get customers to use their pricing power fairly, given the current mind-set of many modern consumers to look for bargains -- to take a very short-term view of commerce as a brutally zero-sum game of deals, not relationships?
2. Is the cognitive load of participating in the FairPay pricing process too burdensome for most customers -- compared to "one-click" seamlessness of "take it or leave it" set-pricing? (Of course this is a bit of a false comparison, given that bargain hunting leads many consumers to take on huge cognitive loads -- such as for credit card bonuses and airline rewards, some extremists spending days researching and making "mileage runs" to get miles with most of the costs and none of the benefits of going anywhere.)

Start with the low-hanging fruit 

The question that matters is not how hard it is to convert your total market of customers, but whether there is a segment of customers who will take naturally to FairPay -- who will make it effective and profitable early on, with a minimum of difficulty:

• What is the nature of those low-hanging fruit customer segments?
• Where can we find and engage them? -- in what businesses sectors?
• How can we target them with niche initiatives to prove the concept and refine it at low cost and risk?
• How can we leverage our early learning to quickly make FairPay more simple and habitual?
• How can we then build on that learning with select customers to broaden the market? 

FairPay is an engine that motivates fairness, but it makes sense to begin using early versions of that engine where it will prove most effective -- in populations that will be eager to take to it. And even if expansion beyond those limited populations is slow, why not enjoy that ripe fruit and increase the Customer Lifetime Value (CLV) of your best customers?

Think of these early sweet spots as the thin end of the wedge of behavior change. As customers begin to see how it improves their customer experience -- their value experience -- they will want to use it more, and others will want to join in that.

Natural customers for FairPay

FairPay is not a new behavior, but a reversion to behavioral norms that are natural, and were the way people conducted business with one another for millennia. But that is a change from current consumer mind-sets (bargain-hunting), and some customer segments will adapt to that more readily than others.

• Some will be slow to shift from short-term, zero-sum thinking -- viewing businesses as an enemy to exploit or be exploited by -- while others will jump at the opportunity to build a productive and cooperative relationship. 
• The trick will be to find lines of business and customer segments who are most disposed to welcome this new logic, those for whom it is most natural.

The behavioral science behind this is addressed in my post Making Customers Want to Pay You -- Research on How FairPay Changes the Game. The key idea is that there are two factors to work with:

1. Social Value Orientation (SVO), essentially pro-social versus pro-self, as individual traits. 
2. Economic/Exchange Relationship Norms versus Communal Relationship Norms, as situational variables in a relationship. 

The sweet spot is in targeting high Social Value Orientation (pro-social) customers, and nudging them toward Communal Relationship Norms. That suggests two related factors to the segmentation strategy:

1. Start with those disposed to generosity -- “superfans” who are loyal and perceive high value (especially appreciative customers of providers who demonstrably deserve generosity for delivering high quality, service, and social value). They are the ones who will respond best to the pricing privilege that the seller grants to the buyer in FairPay, to price in a way that considers fairness to the seller, and who will be least inclined to abuse that privilege.  Managing FairPay offers for these buyers will be mostly carrot, and not much stick. They are the ones who will be most willing to pay you generously for your product or service -- as long as you establish and maintain your position as deserving, delivering on your promises, and asking in the right way for fair compensation.

2. Start with those disposed to cooperation -- dedicated customers who are thrilled to share pricing responsibility, and are willing to bear some modest burden to do that right. What is needed is
not just a desire to be fair, but willingness to make the effort to do so. For that, the key is to target customers who are dedicated to the product or service and/or the provider. Again, loyal/"superfan" customers are most likely to have this dedication. (Benji Rogers of PledgeMusic observed to me that "superfans will happily crawl on broken glass" to support their favorite artists.)

These are the customers who will be worth your while to start with. The FairPay process enables you to test for these attributes with low risk, nudge those who are amenable toward cooperative and profitable behaviors, and cull out those who are not (at least until there is reason to think they might be more ready to cooperate). Many posts on this blog explore various aspects of how to do that, in various business use cases.

Of course it is still essential to make the process as simple and seamless as possible. More of the theory behind that is outlined in
Thinking Fast and Slow about FairPay: A New Psychology for Commerce in a Networked Age.

(As to the related question of how can we leverage our early learning to quickly make FairPay more simple and habitual, I will address that in a companion post.) 

Natural businesses for FairPay

Some businesses will naturally motivate willingness and dedication of their customers to be fair -- and some naturally attract more than their share of customers who are already predisposed to such behavior. Other posts have examined the application of FairPay to some such businesses in detail, for example:

• Journalism: Patron-izing Journalism -- Beyond Paywalls, Meters, and Membership
• Music: The Future of the Music Business -- The Artist is King with FairPay
• Non-profits: A Better Revenue Strategy for Non-Profits in the Digital Era.

Those (and other human creator-driven businesses) are some that are obvious naturals, but many other kinds of companies have already established themselves as having a "customer-first" attitude that makes them deserving of Communal Relationship Norms -- demonstrating that they consistently seek to deliver quality products and services, care about dealing fairly with their customers and are respondive to their individual needs. Such business are also in a prime position to start applying FairPay to their most promising customer segments. (Check out my more comprehensive list of Application/Market Sectors that seem especially likely to do well with FairPay.)

Whatever the field of business, a critical success factor will be the ongoing demonstration of customer-first behaviors that continually lead customers to see the business as responsively listening, and deserving of their trust and generosity.

Grabbing the low-hanging fruit

The next question is just which phase of the customer journey to start with -- to further maximize likely success and minimize risk. Three areas are especially promising as starting points for testing:

• Retention -- win-back offers to subscribers who are asking to cancel (but had previously seen value, and could be profitable at the right price).  This is covered in Winning Back Lost Customers -- Before They Get Lost.
• Acquisition -- offers to potential new customers in selected segments that might see value, but might be put off by paywalls or other set-price offers. FairPay can work as a kind of "fuzzy" freemium to attract these customers.
• Premium “member"/"patron” tiers -- offers to enhance relationships with existing customers known to recognize the value. One example is Times Premier? [/Insider?] -- What is it really worth? ...FairPay can tell. 

Other possibilities include selection of test populations in any way that limits risk and targets segments that appreciate the value of the offering and the personalized value proposition, such as:

• Usage or style segments
• Content segments (such as long-tail items, or by genre)
• Device segments
• Family plans
• Segments that can highlight “deserving” sellers
• Trials, specials, coupons
• Distinct branding or white label offers.

Keep in mind that these can focus on either high value/usage or low value/usage segments. An important feature of FairPay is the price discrimination that justifies lower prices to those who get lower value. For example, retention offers can focus on low usage customers who are well justified in seeking to pay less that the usual all-you-can-eat price. In such cases, those who are asked to pay more can be given to understand why it is that these others pay less, even if that fact becomes known.

Staging the learning process

FairPay is well suited to a step-wise introduction that allows for testing and learning at low cost and risk. The idea is to let both the business and the customers ease into the new logic of FairPay and learn how to apply it effectively. This is addressed in the post FairPay “Free Trial”/“Survey” Mode – Easing into the FP Waters -- And Understanding Your Customers. The Trial/Survey mode it describes can generate significant learning with only simple software -- that can help shape a full FairPay implementation, as well as generate customer value perception data that is valuable in its own right -- even if the project goes no further.

The thin end of the wedge

All of these strategies can lead to effective trials that will serve as the thin end of the wedge of behavior change. The initial strategy should be to find these sweet spots and do low-risk controlled tests there. Businesses and customers will begin to see good results and learn how to apply this kind of win-win strategy. That will generate a virtuous cycle, to increase the loyalty and CLV of the initial customers, then to attract more customers to the game, and then to lead a growing range of firms to create FairPay zones, which will then bring more customers who are ready and willing to cooperate in this more win-win mode of commerce.

With this kind of focused, and carefully staged approach, the risks can be kept small and easily managed, the learning can be done over time, and the potential rewards can be immense!

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For a full introduction to FairPay see the Overview and the sidebar on How FairPay Works (just to the right, if reading this at FairPayZone.com). There is also a guide to More Details (including links to a video).

Even better, read my highly praised new book: FairPay: Adaptively Win-Win Customer Relationships.